Salary Packaging

Novated leases are a very popular way for employers to reward their best staff members. It’s such a part of Australian business culture that attempts to change the system a couple of years ago created a very big stir indeed.

If you are an employer, it’s not compulsory to offer your workers a novated lease as part of their salary package. However, it’s an option you might want to consider. But when is it a smart option for you to offer this sort of deal?

It’s time to ask yourself a few questions to help you make this decision.

Is he/she a worker who deserves some sort of reward? If yes, then you can go to the next question. Obviously, a drone who shows up late, leaves early and spends loads of time hanging around the water cooler gossiping, or even if their performance is only mediocre, you probably shouldn’t reward them.

Have you spent a lot of time training this employee and/or do you feel that you’d be lost without him/her? Setting up a novated lease encourages your office Superman/Superwoman to stay with you rather than transferring to another job. They won’t just stay because you’ve been nice; they’ll also hang around so their car repayments will be taken out of their pay packet before tax rather than afterwards.

Does your employee do a moderate amount of work-related travel? Here, things get a bitYou may or may not encourage use of the logbook system when setting up a novated lease with your employee. However, if your employee does loads and loads of work-related trips, he or she will probably not benefit all that much from a novated lease and may not consider it to be much of a reward. You may want to consider leasing a company car that they use for work purposes only, although this will depend on the size of your business and the nature of your work.

Do you have a fairly tight budget? Novated leases are a real boon to not-for-profit organisations or businesses with tight margins, as there’s no overhead cost to theYou may not be able to give your employees a raise to reward them if the funds aren’t there but you can set up a novated lease for them instead.

Do you want your employees to do some work-related driving but want to save hassles and paperwork regarding assets and liabilities? A car financed through a novated lease scheme doesn’t count as an asset or a liability for you and your company, meaning that you can leave these vehicles off the balance sheet.

Do you want to claim an extra input tax credit? Of course you do every little tax credit helps! You get to claim an input tax credit on any GST paid as part of a novated

Of course, setting up a novated lease for your employees has lots of ins and outs, and you probably have other questions you want to ask about the process. But that’s what we’re here for ask us whatever you like!

Most of us have at least heard about novated leases, especially with all the fuss last year about the proposed changes to the system, which were promptly scrapped again. However, for some of us, we may be holding back from agreeing to this form of salary packaging because we’re believing some of the very common myths about novated leases for cars.

Myth 1: You have to earn a huge salary to be able to afford the repayments.

While the most noticeable novated leases (and cars bought on a novated lease scheme) are the ones that involve the latest and best luxury vehicles, this isn’t always the case. You don’t have to be in the top tax bracket to benefit from a novated lease and you don’t have to purchase a fancy new car through this system easier. In fact, a novated lease agreement can keep you in a lower tax bracket while still getting rewarded by your employer for a job well done. And you can get any sort of car under a novated lease scheme, as long as you can afford the repayments just like you would with a personal car loan. However, there are some limits on the age of car that you can get you can’t get a really old banger. But would you really want to?

Myth 2: You have to travel heaps of kilometres to really benefit from a novated lease.

One of the issues with the proposed FBT tax changes last year was to do with the keeping of logbooks to keep track of your kilometres travelled. Some may have thought that you had to be on the road just about all day every day before you could benefit from a novated lease. This isn’t the case you can reap the benefits even if you just use your car for the daily commute (and we all use our cars for way more than that). In fact, if you travelled all day every day for work purposes, the chances are that you’d be issued with a company car anyway.

Myth 3: You have to be using the car for work purposes to get a novated lease.

Under a novated lease scheme, you can use the car for business purposes or personal purposes or you could even just leave it sitting parked in the driveway to impress the neighbours. It’s like taking out a personal loan for a vehicle except that your repayments are taken out of your pay packet before your boss gives it to you rather than afterwards meaning that you have less income tax to pay (OK, there’s fringe benefit tax, but that’s another story ask us if you’re not sure about how this works). Once you’ve got the car, you can do what you like with it.

Myth 4: You don’t need to insure a vehicle that’s under a novated lease.

Don’t be fooled! Like any other car, you will need to make sure that it’s properly insured so that you’re covered when you’re on the road.

Myth 5: Your employer gets to pick the sort of car you get under a novated lease scheme

The choice of car is up to you, as long as the repayments are manageable and the car is under a certain age (usually 8 years). After all, you know your personal needs in the way of a vehicle better than your boss does.

Just when we thought we were getting the hang of what was going to happen with the new fringe benefit tax system, and those of us who were lucky enough to go ahead and get a car through a novated lease scheme (thanks to our employers) were learning how to go about using logbooks, we had an election that resulted in a change in government. And the proposed changes to the rules which were anything but popular were scrapped.

So, breathe a sigh of relief, everybody. Stop scratching your heads over how to fill out a logbook and working out what is and isn’t a business trip. We can all go back to using the most common method of calculating the fringe benefit tax we have to pay because we’ve got the perk of a car.

You won’t be the only people breathing a sigh of relief. The proposed rule changes were very bad news for Australia’s car sales industry, as a lot of business is created by our novated lease system. It ensures a lot of turnover which isn’t just good news for car sales people but also for road safety and our car manufacturing industry. When people get a new car under a novated lease scheme fairly easily, this means that they’re less likely to stick with some old rustbucket that doesn’t have as many safety features as a new modern car. This means that Australia’s roads are more likely to have lots of safe cars with all the protective gadgets on them, which means safer roads and fewer accidents.

It’s also good news for smaller businesses and charitable organisations. Often, these employers want to keep hold of their best workers but don’t have the budget in place to provide other incentives and rewards. Including a car in the salary package is an easy way for these people to reward and retain the good people it’s so much easier than trying to pay them more, which may be a disincentive for some employees, as it means that they pay much more tax when they pop over a certain threshold.

Of course, logbooks haven’t been scrapped altogether. Some people were on the logbook system before the proposed changes came in anyway. They’re still going to be doing things the same way, and are probably the only people who aren’t breathing a sigh of relief (but if you’re in this category, you can stop feeling smug).

Some people felt that the reaction from the car leasing and car sales industry was a bit over the top. After all, it’s not as though the proposed changes were planning to scrap novated leases altogether. Companies could still create salary packages involving new cars as a way of rewarding their best employees; the only real difference was that people were going to have to keep logbooks and use them to calculate the amount of fringe benefit tax they would have to pay. And after the initial shock and downturn, the car sales and lease industry would have bounced back once we were all used to the new way of doing things. But who’s to tell now? Who knows what would have happened?

The good thing is that we can now carry on as normal. And no matter whether you’re considering setting up a novated lease agreement or whether you’re just considering taking out a loan to buy a new car, we’re here to help you find what you need.

The recent changes in the rules about Fringe Benefit Tax will mean that all vehicles that are involved in a novated lease as part of a salary package will need logbooks so the people with them pay a fair amount of fringe benefit tax.

Your company accountant will probably give you a brief run-down on how to fill out a logbook and give you a few basic pointers about what is and what isn’t considered personal use. However, we thought we’d give you a few case examples to help you wrap your head around the concepts.

Case 1: Stephanie works at a small retail store. She uses the car that is part of her salary package to drive to work, obviously. The trip to and from work is considered to be a personal trip (and considering that Stephanie drops her children off at school on the way to work in the morning, most of us would think that this is fair enough. This trip goes into the logbook as a personal trip, therefore. From time to time, Stephanie has to meet up with business contacts such as suppliers and wholesalers to talk over a new deal. Driving to meet these people counts as a business trip and Stephanie can certainly claim this amount back against tax. Occasionally, the boss asks Stephanie to deliver a purchase to a customer using her car. Again, this is considered to be a business cost. Usually, the journey home is a personal trip but if the boss has told Stephanie Hey, the person who put in this order lives over in your part of town could you drop it off to him on your way back home, then this would count as a business trip. Naturally, all the trips Stephanie makes in the weekend and doing the Mum’s taxi runs are personal trips.

Case 2: Gary works for a contracting crew. Usually, he drives in to work and parks his car (part of his salary package) up for the day at headquarters before piling into the work van with the rest of the crew to head out to the various sites the contracting work is done on.As you may have already figured out, the trip to HQ is a personal trip. However, if something crops up that means that Gary and a couple of workmates have to nip over to another site while the main work van goes elsewhere, and they have to take Gary’s car, that counts as a business trip. And if the foreman asks Gary to go and pick up a few edible treats from the supermarket on Friday afternoon for a special end-of-the-week feed, and Gary uses his car, this is a business trip, too, even though Gary picks up a few groceries for himself at the same time.

Case 3: Kathy is a social worker and counsellor who works with troubled teenagers. The organisation she’s associated with has an office, where she sometimes does her counselling work and where she touches base with the others in the organisation. As you probably have guessed, her trip to headquarters is a personal trip. However, she also goes out to quite a few high schools to meet with her counselees and has even been known to meet with them in the evenings. All these trips are business trips. If she decides to take a group of the teenagers she’s working with out to the movies as part of her work with them, the trip to the cinema is also a business trip.

Case 4: Jeff is a sales representative and drives a lot from client to client. The chances are that he won’t be getting a car as part of a salary package, as those who do lot of driving for business purposes don’t usually get a set of wheels under a novated lease.

The recent changes in the fringe benefit tax rules are making things very difficult for employers, employees, loan brokers like us and car dealers. The way Australians buy cars is changing and employers can’t use their default solution for keeping and rewarding their valued employees. The changes will affect all new novated leases set up from the 16th July 2013 onwards.

There are a few people who won’t be affected. If you are self-employed or a sole trader who uses their car for work purposes and claims back a few travel expenses, nothing’s going to change. If you’re an employee who uses a car that belongs to the company and you use it nearly all the time for work purposes (e.g. if you’re a sales rep who has to travel to your clients) then things aren’t going to change for you, either. And if you have an existing salary package that involves a novated lease, everything will stay the same under the current lease and the changes will only affect you when the current lease expires and a new one starts.

The changes apply to novated leases as we know them the situation where a company sets up the lease for a new car that their employees can use as they wish, and the payments for the lease are taken out of the pay packet before tax so the employee gets the perk of a new car but stays in the same tax bracket and doesn’t have to fork out any more income tax although they will have to pay fringe benefit tax.

Under the old system, there were two ways of calculating the amount of fringe benefit tax that someone had to pay. You could choose to keep a logbook and record all your trips, along with whether or not it was a business or personal trip, and the proportion of personal to business trips was used to calculate the amount of fringe benefit tax to be paid. Or else you could just use a formula based on the cost of the car times 20%, and there was no need for logbooks.

Under the new system, it’s logbooks all the way so you pay fringe benefit tax for the personal use of the car. The irritating thing about this is that the trip to and from work is considered to be personal use rather than a work trip. One of the headaches for employees and employers alike is that the new system requires a lot more paperwork. The idea is that people shouldn’t be claiming back more expenses than they are actually entitled to and should pay the right amount of fringe benefit tax.

The Rudd government thought that keeping logbooks was going to be the only change that people would really be affected by (as if that wasn’t enough hassle in itself!) but the economy as a whole seems to be affected.Car companies, especially companies providing company cars, are not selling/leasing as many vehicles, as a lot of people don’t want to set up a new lease under the new system. Some employers are left scratching their heads as they try to think of other ways to reward their staff and keep them in the company that aren’t going to cause headaches and hassle after all, having to write down every single trip to the dairy and every single Mums taxi trip is not that much of a perk for a busy person trying to juggle work and family. Charitable organisations are also affected, as salary packaging deals are the only way that they can reward their employees on a tight budget.

It’s going to be a case of watch this space, as there’s a lot of opposition to the changes and further changes may be in the wind.

In the meantime, if you are on the lookout for a new set of wheels, don’t forget that ordinary regular car loans aren’t affected by these changes at all.